Diversify Internationally with Mutual Funds
Last updated on January 28th, 2019
In the era of globalization, why keep your financial investments confined to your country?
When using products and services provided by international companies, why leave the opportunity to invest in them?
Today, there are a plethora of international mutual funds available to invest in. Depending on your investment style you can choose among the various options available like active/passive funds, developed and emerging markets, the single country focused, region focused global or theme based funds. Currently, there are funds available that invest in the US, Europe, Asia, and Brazil. There are also theme based funds that invest in real estate, energy, consumption, and agriculture.
Why should you have international diversification to your portfolio?
Travel and abroad education has become part of most Indian families. When you are investing towards such goals, why not invest in that country you wish your kid to study or take them on vacation? This way you’ll be able to address the currency risk if rupee is the depreciating currency. Other instances could be, if the Indian markets are experiencing turmoil, diversify using international mutual funds would come for your rescue. Or, when your goal is to invest in the world’s biggest MNC’s like Google, Facebook, Apple, Microsoft etc.
How to and how much to invest in international mutual funds?
Investing in mutual fund schemes that invest in foreign markets gives your investments international exposure. Or investing in other funds in foreign markets, this is in the form of fund-of-fund and is called feeder route.
According to experts, having 10-20% exposure to international mutual funds would help in countering the underperformance in the Indian market. Chinese Funds may have become too risky in the current scenarios, despite their stellar one-year returns. With the implementation of a new economic growth strategy; comprising of fiscal stimulus, monetary easing and structural reforms Japanese markets hold a good potential for investment. And, the U.S markets are well balanced in terms of risk and reward.
Diversification: This simply doesn’t mean investing across various assets classes like Equity, Debt, Gold, etc. Risk can be mitigated by investing across geographies as well.
The table below shows the performance of different markets over a period of time, by highlighting that no single market is a clear winner over time.
With the variety of investment options, you can invest either in a stable and large global economy to get high returns or in an emerging economy other than India.
Geo-Political Risk: International mutual funds are exposed to economic and geopolitical risks; some kind of political unrest could have a great impact on the country’s economy.
Tax Treatment: International mutual funds with at least 65% of their investment in Indian Equity are treated as Equity funds and are taxed at 10% LTCG over capital gains of Rs 1 lakh for an investment horizon of over one year. And at 15% for short-term gains. While all the other type of funds are taxed like Debt Funds. Long-term gains for investments over three years are taxed at 20% with indexation benefit and for short-term, it is taxed as per the investor’s tax slab.
Currency Risk: The underlying asset for an international mutual fund is in the foreign currency, the investment is exposed to currency risk. Therefore, be aware of the implications as rupee appreciation or depreciation may have a significant impact on your capital gain or loss.
Looking at the positive side of currency risk, upon studying the long-term trend of the Indian rupee, it tends to depreciate against major global currencies such as the US dollar. If you have a goal that needs to be funded by dollars, such as kids’ education or travel. Having a US fund in your portfolio helps you address the risk of rupee depreciation.
This is a great way to diversify your investments and get financial exposure. The aim is to pursue growth by investing in the high growth market and mitigate the risk of focusing on domestic markets alone. International mutual funds should be as a supplement to your core domestic investment portfolio.
We’ve heard people talk about not putting all eggs in one basket. This is true to investments. International mutual funds allow you to diversify across geographies, market conditions and currencies.
Therefore, this is the best opportunity to invest in big, stable and established companies globally. Nevertheless, on the riskometer, these type of funds are categorized as high risk. Therefore, it is of utmost importance to keep in mind your investment objective and risk appetite before investing in this category.